Income and energy consumption in Asia-Pacific countries – A panel cointegration analysis enhanced with common factors

Abstract

The research presented in this paper re-examines the relationship between energy consumption and income for a panel of Asian economies for the period 1971–2018. The Asian economies represent a dynamic, diverse, and interesting set of countries on which to base an examination of these relationships and the tendencies for these economies to be on a path of convergence and integration in their energy consumption and use characteristics. Our convergence analysis provides evidence of convergence in energy intensity among the countries. Panel data methodologies are employed to gain the advantage of increased explanatory power of the econometric analysis. Importantly, we incorporate common factors as a means of accounting for variables beyond the bivariate relationship. The results find support for the flow of causality running from income to energy consumption, albeit with short-run feedback. As a result, current policies aimed at reducing energy intensity and CO2 emissions are not expected to significantly inhibit economic growth. The results are consistent with the seminal paper by Kraft and Kraft (1978). Additionally, we find the long-run income elasticity estimates for the panel double in size when unobserved common factors are excluded.

Keywords

• Energy consumption
• Income
• Panel cointegration and causality
• Common factors